Bancor provides for an automated decentralized exchange with its on-chain liquidity Protocol. Without Liquidity there is no freer or fairer economy.

For clarity, when people invest their money in a token type, they are contributing to the liquidity pool of the token.  However, when they need their value back to use it for purposes other than investment or if they are looking to invest their value with some other token, they need to have the infrastructure in place to swap their value to a desired token.  Using atomic swaps, one kind of token on the network invested on chain can be used to convert it to another kind of token on the network.

Bancor is considered to be less risky for liquidity providers.  Before understanding the liquidity provider risk, it is important to understand, what is liquidity provider risk? Bancor takes to the ideal of constantly rebalancing portfolios of liquidity providers by taking to the phenomenon of impermanent loss.

Understanding Impermanent Loss

The important thing to understand is that when a token is invested in a liquidity pool, the investors expect that “its value if raises with the pool” can be cashed out. 

The first thing to understand is that, every kind of token is backed by projects and the developer activity and the acceptance of the project and the interest of the people to invest in the Dapps and projects.  Every blockchain has a set of developers working towards one project or the other.  Thus, the tokens move relatively with each other. 

The value of one kind of token might relatively increase or decrease in value with respect to another. If one particular blockchain is performing well, and the products like Dapps of the blockchain are well accepted by real-time users then the value of the token increases.  So, there will be a value increase or decrease for every blockchain project and therefore the token.

So, there will be a relative growth in token value between two different token ecosystems.  So, when the value of the token raises in value while in the pool, any user will expect to cash out the raise.  However, the reality is that when they take it out of the pool the cash out will not be as expected.  It will be a lot less.  This is because tokens exhibit a relative growth in value with each other in the overall cryptocurrency ecosystem and anytime a withdrawal or swap takes place there are transaction charges.  These transaction charges are the income for the blockchain.  When the value of the token increases, there is a lot of backend effort from developers and exchanges in setting the stage for the value increase to happen and they are obviously to take a percentage share of the increase in value.

All participants contributing to the rise in value of token need an economic incentive.  CoinTelegraph previously reported this as a new approach which uses economic incentives to cover the cost of impermanent loss.  Impermanent loss is a phenomenon caused by the constantly rebalancing portfolios of liquidity providers. As two tokens diverge in price, LPs suffer smaller gains and larger losses compared with a benchmark 50-50 portfolio.